Wednesday, September 30, 2009

Take a look at this funny story about a St. Louis teen in hot water for starting his own line of clothing in competition with North Face Apparel. The teen, Jimmy Winkelman, has marketed clothing under the name of "South Butt," making a whopping $4900 in annual revenue his first year. Despite the meager earnings of this 18 year old's company, North Face Apparel has threatened to sue. Albert Watkins, attorney for Winkelman, commented: “North Face has indicated as a matter of record that the public will somehow be confused by the South Butt product,” Watkins said. “There appears to be little recognition, if any, that the savvy of consumers precludes anyone from confusing a face with a butt.”

Seventy-three professors issued a joint letter supporting the creation of a Consumer Financial Protection Agency at the federal level. We are strong supporters of the importance of this legislation in that consumer transactions lack the transparency that is necessary for honest and fair financial products, including, a wide variety of debt instruments (i.e., mortgages, credit cards), payment devices such as debit cards, and banking fees in general. The letter supports the passage of H.R. 3126, introduced by Rep. Barney Frank (D), creating the oversight agency. Some of the impediments to governmental oversight have included the dispersion of regulatory authority over a number of federal agencies none of whom has consumer issues as the primary mission, emerging financial products and technology that raise new regulatory issues, and industry opposition. We will certainly follow the progress of this legislation (and related legislation such as the Consumer Overdraft Fair Practices Act) and the industry response (see, Big Banks Alter Debit Overcharge Rules).

The press release:

FOR RELEASE ON SEPT. 29, 2009 AT 10:00 AM:Consumer and Banking Scholars Show Support for the Consumer Financial Protection ActHempstead and Jamaica, NY – On September 30, 2009, the House Financial Services Committee, chaired by Representative Barney Frank, will hold hearings on H. 3126, titled “the Consumer Financial Protection Act” which would create an independent Consumer Financial Protection Agency. Today more than seventy law scholars who teach in fields related to consumer law and banking law have signed a detailed Statement of Support demonstrating their strong views about the importance of this legislation.

The faculty endorsing the Statement of Support include leading scholars who teach in fields related to consumer law and banking law who teach at many of the nation’s leading American law schools—in states including Alabama, Arizona, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, New York, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming as well as Washington, D.C. The signatories have no economic stake in the passage of this legislation.

The Statement concludes that on balance, the existing regulatory structure places “a higher value on protecting the interest of financial product vendors who promote complex debt instruments using aggressive sales practices, than on protecting the interests of consumers in transparent, safe, and fair financial products.” The body of the Statement is 8 pages long, single-spaced. It refers specifically to dozens of scholarly articles and studies demonstrating that at critical moments of consumer confusion and vulnerability,” the existing regulators “have been unwilling to expend resources to develop appropriate rules and guidelines and to police mortgage and credit instruments.” The Statement urges passage of H. 3126 because “consolidated authority and a dedicated consumer-oriented mission would be likely to improve public confidence in the safety and efficiency of the vast consumer financial products marketplace.” It further provides an analysis of desirable aspects of the legislation and points to extensive scholarship supporting the need for a new approach to handling consumer financial regulation.

For further information please contact the signatories of the Statement at their home institutions or:

Wednesday, September 23, 2009

Presumably trying to get out in front of proposed legislation that would require banks to ask their customers if they want to "opt in" to debit card overdraft protection, JP Morgan Chase and Bank of American recently announced that they would be altering their overdraft policies. Both banks will stop charging overdraft fees for very small amounts (less than $5 for Chase and $10 for BofA) and will soon provide their customers with the option to opt out of overdraft protection so that a purchase would not be authorized if it would put the cardholder into an overdraft position. Both banks also plan to limit the number of overdraft charges that may be imposed in a single day, and Chase will also drop a controversial method of calculating overdrafts.

So, have Chase and BofA, done enough to forestall legislation? While the changes they plan to implement are certainly a step in the right direction, they hardly eliminate many concerns.

For example, the exception for small overdrafts may only protect the cardholder if they deposit sufficient funds to cover the overdraft before making additional charges. But if the cardholder is not notified of the overdraft situation, how often will that happen?

The limits on the number of overdraft fees also hardly eliminate the seeming unconscionability of the arrangement. As an initial matter, they will apply only to purchase at stores, not ATM withdrawals. Second, the amount of fees will continue to bear no reasonable relationship to amount of the overdraft. Bank of America is limiting its cards to no more than four overdraft fees per day. But the fee remains $35 per overcharge, regardless of the amount. So, a customer that makes four purchases over the limit that total just $11 or $12 dollars would pay $140 in fees. The result at Chase is only marginally better. It will impose a limit of three fees per day, but they would total $89 on three overcharges that could amount to as little as $5.01. As Brad Tuttle wrote on the Time website, "[s]o the poor saps who are dumb enough to spend more than they have in their accounts—and who do so more than three or four times a day—are thrown a bone." I would add, a very small bone at that.

I have not seen any justification for these fee levels. Surely, a bank providing overdraft protection should be entitled to a reasonable return on the money it effectively lends to its customer as well as a reimbursement for the incremental administrative fees it incurs because a charge results in an overdraft. These fees appear to exceed the bounds of reason by several orders of magnitude. And surely, the banks would produce the data necessary to justify them if it existed.

Even the proposed new opt out provisions are less than they seem. They will require the customer to forgo overdraft protection for check writing as well as debit card use, a risky proposition given that many vendors charge their own penalty fees for bounced checks.

One doubts that these steps will satisfy the concerns of those in Congress who have proposed legislation to limit overdraft fees.

While working in my office this week I received an email "receipt" from Paypal reporting a $10.00 payment to Skype (an online phone service). I've not used my Paypal account in some time, so my first thought was that this was a fake Paypal email. After all, it is commonly known that Paypal is regularly fighting the fake emails that are sent out hoping that the recipient will click on the embedded links. See, How Do I Report Paypal Fraud or a Paypal Scam. Nevertheless, I logged into my Paypal account to make sure (opening a new browser and entering the web address manually). There it was, a $10 payment to Skype on my Paypal account. The email I received was not a fake one from Paypal. It really was a receipt for a $10.00 charge.

Now, I do have a Skype account that I used when travelling abroad (worked great in Moscow), but it is not active at this time with any on-going subscriptions. Moreover, I never used Paypal to pay Skype in any event. I logged into the Skype account to verify nothing was active, which was still the case. Apparently, there have been some complaints that consumers are unable to cancel Skype once they open an account (see Skype forum).

Since the problem did not appear to be with Skype, I called Paypal. Although it took two customer service reps to get to the bottom of the problem, it turns out someone had logged into my Paypal account four times that day and authorized the transaction to Skype. Kudos to Paypal for agreeing to reverse the charge quickly and sent me an email within 24 hours "resolving" the case in my favor and saying that the charge will be reversed within five days on my American Express card.

Luckily for me, I do not have my bank account connected through Paypal. Paypal does, though, encourage users to connect bank accounts. As a payments professor I can easily imagine the havoc a Paypal hacker can create by draining a user's checking account, leaving the user waiting as long as ten days for a provisional recredit (Federal Reserve Consumer Handbook to Credit Protection Laws: Electronic Funds Transfers). So, consumers should exercise caution with all payment devices that are connected to their checking accounts in case of fraud, including both debit cards and services like Paypal.

A final interesting question is why did the thief choose $10 and why Skype? The $10 amount is not as likely to get noticed or to encourage authorities to make the chase. Skype is a European company which also might make catching thieves more tricky. But, since it deals in phone services, the thief probably either used the $10 asset before being caught or resold it to someone else. All of which contribute to the success of the hacker in these instances. What else can be done in these cases? It seems that the best solution is preventing the hacking in the first place through better security. Not sure how the hacker managed to get into my Paypal account, but there appear to be web sites that claim they can instruct you how to do it. Just another wild day in modern payment systems.

Monday, September 21, 2009

For those in the NY area, Seton Hall has an upcoming symposium entitled "Securities Regulation and the Global Economic Crisis: What Does the Future Hold?", and will take place on Friday, October 30, 2009, at Seton Hall University School of Law in Newark, NJ. The event is free and open to all. Plus Seton Hall is offering six (6) New York CLE credits for full-day attendance. Further information about the Symposium, a list of presenters, and a link to register can be found at http://law.shu.edu/lawreviewsymposium.

Wednesday, September 16, 2009

As the height of the law review submission season is coming to a close, I thought I would observe an interesting approach by a law review editorial board and some other general observations.

Law Reviews Gaming it Up. The editors at the University of Cincinnati Law Review, who will ultimately publish my piece on fixtures Groping Along between Things Real and things personal, engaged in a nice piece of behavioral prediction in making the offer to publish. In the offer letter the editors offered two choices: (1) I could expedite with anyone over the next two days; or (2) I could expedite with only the top 30 law reviews over the next 10 days. This strategy is genius from the law review editor standpoint. First, its highly likely that the reviews most likely to take the piece out from under Cincinnati are those ranked between 31 and 51. The strategy by Cincinnati reduces to almost near absurdity the time frame for journals to respond. On the

other hand, if they are likely to lose an article to a top 30 journal, then 10 days will likely not be needed for that decision to reveal itself. This is the kind of law review gamesmanship that I like and support! Has anyone else seen an offer like this before?

Lex Opus is a good secondary alternative to Bepress's Expresso. In some ways, the system operates just a smoothly. Another feature that I liked was Lex Opus allows law reviews to view the work sua sponte and make the author an offer -- I received one offer that was not unattractive. That seems to me to be a pretty good idea and, though I imagine that such offers are rarely accepted, it is still a nice feature. But the best feature is its cost -- its free.Peer Review of General Law Review Articles. Brian Leiter this morning posted a link to PRSM -- A consortium of law reviews engaging peer review processes. Journals that have signed on to the consortium include The South Carolina Law Review, The Mississippi Law Journal, Stanford Law Review, and the Wake Forest Law Review. It will be curious to see if this is successful.

Tuesday, September 15, 2009

Happily, Bernanke stated today at the Brookings Institute that he believes that the growth we are seeing in the economy suggests that the recession is technically over. Unfortunately, the unemployment rate, currently around 9.7%, will be slow to come down. This will leave many still struggling with the pace of a slower recovery. This is good news, for sure. Since last fall we were bracing for another "Great Depression," pehaps we can be contented with simply riding out slow economic growth. And, of course, Bernanke emphasized yet again the need for regulatory overhaul of some type. Perhaps the more times we hear this, the more likely it might be that action will follow. Let's hope.

Monday, September 14, 2009

In case you missed it, President Obama spoke this morning on the financial crisis and recovery efforts (see Obama Remarks on Financial Rescue). In terms of regulatory overhaul, President Obama remarked that it is a "false choice" to believe that entrepreneurism and innovation are sacrificed by regulation. Something President Obama has stressed is "common sense" rules of the road. People's memories seem to falter once a crisis begins to pass. After all, government intervention seems to work, so why burden business with onerous regulations? For my part, I believe the United States has been lucky in its ability to slow the financial crisis and begin rebuilding. Recovery, though, may turn out to be much slower than we might hope (see Recovery Slower). As we've said here before (see War of Wealth), this country has been down the road of bank failures and financial crisis before. President Obama and Chairman Bernanke (see Bernanke Sees Progress) are telling us that something substantial needs to change. With competing issues like health care and impending flu concerns, will we heed the warnings that are Obama, Bernanke and others have delivered? Or, will we continue on with business as usual? Hmm, the markets are up today (see Bloomberg) .

This one wasn't hard to predict: credit card issuing banks are already making lemons out of lemondate with the new regulations aimed at curbing abuses. Business Week reports (no link available) that issuers are expecting new fee income (especially from cardholders who pay off their balances in full every month or don't use their cards very often) to more than make up for the losses caused by the new regs. Prohibit them from raising rates without 45 days' notice, and they all switch to variable rates (jumping throung one huge loophole in the regs). Prohibit marketing to college students "near" campus, and they set up tables two blocks away, say near a fraternity or sorority house. For those of us teaching commercial law and regulation, consumer protection, and administrative law, this is one more chapter in the saga of regulators' introducing rules that both fail to curb the real abuses, as well as increasing the abusive potential of the work-arounds put in place by the industry. When are we going to learn?

Saturday, September 12, 2009

Many of you are probably snickering just reading the title. Seems obvious enough to most. Nevertheless, it seems from time to time even a business party to a contract will claim they did not read the contract. Such was situation in the recent case of Amit Israeli v. Dott. Gallina S.r.l. Dario Gallina and David Gallina (W.D. Wis. 2009). Not a simple case of not reading, but not a surprising outcome. Israeli, a U.S. citizen, contracted with Gallina, an Italian concern, to sell Gallina plastics in the United States according to a price list that Gallina provided. The operating agreement was in English, but the price list was only in Italian. While the operating agreement specified that the law of Wisconsin applied, the price list stated that disputes would be resolved exclusively in the Court of Turin. Israeli, who did not speak Italian and did not ask for a translation, initialled the price list anyways. When a dispute developed about the price charged for shipments and Israeli brought suit in Wisconsin, Gallina argued that the Court of Turin should resolve the dispute. The CISG, which applied to the transaction since the parties were both doing business in contracting states, does not address issues of "validity" of specific contract provisions. See Article 4.

Israeli claimed unconscionability should prevent the application of the forum clause since: (1) he did not read the price list and (2) it was in Italian, which he could not read, even if he tried. The court, agreeing that there was some procedural unconscionability, rule that the forum selection clause was not substantively unconscionable. Not only was Israeli's claim that he did not read the contract a "nonstarter," his claim that the price list was in Italian was also a loser:

Equally unpersuasive is plaintiff's argument that the forum selectionclause was written in a foreign language. "[Plaintiff] makes much ofthe fact that the written order form is entirely in Italian and that [Plaintiff]. . . neither spoke nor read Italian. This fact is of no assistanceto [Plaintiff's] position. We find it nothing short of astoundingthat an individual, purportedly experience in commercial matters, would sign acontract in a foreign language and expect not to be bound simply because hecould not comprehend its terms. We find nothing in the CISG that mightcounsel this type of reckless behavior and nothing that signals any retreatfrom the proposition that parties who sign contracts will be bound by themregardless of whether they have read them or understood them.

This outcome holds no surprise to me. Quite simply, the party who chooses to do business in a language that they do not understand bears the risk of having done so. Israeli did not speak Italian and did not arrange for a translation. As such, he bore the risk of having done so. While this is not a case where both parties subjectively understood they chose to resolve all disputes in Turin, Italy, the forum selection clause is easily allocated to Israel who could have avoided the misunderstanding. Off to Turin, Italy he should go!

Now ratified by 73 countries from every geographical region, representing every stage of economic development and every major legal and economic system, the United Nations Convention on Contracts of the International Sales of Goods (CISG) has changed the way international sales contracts are drafted and resulting disputes settled. In the decade since the Third Edition of Professor John Honnold’s classic commentary, there has been vast growth in the number of decisions from tribunals around the world which have applied the CISG, an explosion of new scholarly analyses of the Convention, and remarkable developments in the research infrastructure that permits access to those materials. These developments have raised many new issues, and have deepened our understanding of (or, in some instances, effectively resolved) old ones. The remarkable progress of this epoch-making uniform international law calls for an updated edition of Professor Honnold’s treatise.